CB prudence lower eurozone bond yields
Fed minutes signals cautious approach to hikes
LONDON, May 25, Borrowing costs across the euro area fell on Thursday on further signs that major central banks are wary of stepping back from ultra-loose monetary policies too quickly.
US Federal Reserve policymakers agreed they should hold off on raising rates until it was clear a recent US economic slowdown was temporary, though most said a hike was coming soon, minutes from their last policy meeting showed on Wednesday.
Bank of Japan board member Makoto Sakurai on Thursday ruled out the chance of an imminent hike in the BOJ’s bond yield target, stressing the need to maintain its massive stimulus programme to prop up inflation.
As is the case in the eurozone, growing signs of life in Japan’s economy have presented the BOJ with a communications challenge, pushing it to be clearer with markets on how it might dial back its stimulus, although such action remains a long way off.
In the single-currency bloc, European Central Bank officials have indicated this week that while monetary policy will reflect an improving economy, inflation remains weak so there is no need to deviate from the policy path already laid out.
“The BOJ and the ECB are the ones with the long-standing structural weaknesses and there are bigger fears about the risk of a taper tantrum,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
Cautious
“That’s why the ECB and BOJ will be a lot more cautious in their communication as well — they don’t want to take any risks even though things are going well in both Europe and Japan.”
The tone of central bank wariness has comforted rate-sensitive bond markets, although traders expect the next Fed hike to come next month.
As European markets approached the close, Germany’s 10year Bund yield — the benchmark for the region — was down 3.5 bps to 0.37 percent. It is down almost 10 bps from seven-week highs hit earlier in May.
Most other eurozone yields slipped 3-4 bps, while US Treasury yields were flat.
The Fed minutes also showed that staff proposed a plan to wind down the more than $4 trillion of debt securities amassed as part of efforts to stimulate the economy. In a move some investors cited as reassuring, the plan included a limit on how much would be allowed to fall off the balance sheet each month.
“The way the Fed is going to achieve balance sheet normalisation can be interpreted as mildly bullish,” said Rabobank bond strategist Lyn Graham-Taylor.
Trade was generally subdued due to a public holiday in a number of countries across Europe.
Bond prices were steady after an OPEC meeting in Vienna, when cuts in oil output were extended by nine months to March 2018.
This is primarily because the move was largely priced in; oil prices actually dropped 0.9 percent on Thursday after nearly three weeks of steady gains.